Running a nonprofit organization requires talent, hard work, and determination. There are many moving pieces to success including managing people, fulfilling a purpose, and prioritizing events. It is not uncommon for the details surrounding the organization’s financial health to get overlooked.
However, to stay compliant and transparent, a nonprofit must assign appropriate attention to the organization’s financial records. In this article, we focus on one of the financial statements your nonprofit should be generating regularly and using to assess performance, growth potential, and sustainability.
What is the Statement of Activities?
You’ve probably heard of an income statement. Also called a profit and loss, or P&L statement, the income statement, along with a balance sheet and statement of cash flows, are standard financial reports for any business.
However, as you know a nonprofit is not like any other business, so it is no surprise that nonprofit financial reports are different. For nonprofit organizations, the financial report that meets the requirements for an income statement is called the Statement of Activities.
The Statement of Activities shows users how much money the organization earned and spent over a specified time period. The report can be generated to show an entire year of the activity or one month at a time.
Reading the Statement of Activities is helpful to internal users, like Board Members, CFOs, managers, and founders, but can also be used outside of the organization when shared with the public, potential donors, members, lenders, or investors.
The Statement of Activities gives a clear picture of how much money is available, or needed, for new programs and projects, areas the organization can improve cash flow, and the changes in revenues and expenses when compared to prior periods.
It is common knowledge that businesses must pay taxes and file a federal income tax return each year, but for tax-exempt organizations, compliance requirements are different. While there is no federal income tax return required for not-for-profit companies, they must still complete an annual return, called Form 990.
Just like the tax return is generated using information from the income statements, the information reported on the Statement of Activities is used to complete the annual Form 990. An accurate and timely Form 990 allows nonprofits to protect their nonprofit and tax-exempt statuses, as well as serve as evidence of transparency and financial stability.
What Goes On The Statement Of Activities?
There are three main components shown on a Statement of Activities: revenues, expenses, and net assets. The report is presented in an easy-to-read, concise, format that may be one page in length or extend over multiple pages.
The first category to appear on this financial report is revenues, or how much money the organization is collecting. One of the most challenging aspects of tracking the financial health of a nonprofit organization is properly recording diverse sources of income. The two main types of nonprofit revenue are contributed revenue and earned revenue.
- Contributed revenue – Contributed revenue is money collected from sources offering support, like donations, fundraising proceeds, and federally funded or private foundation grant funds.
- Earned revenue – Revenue collected as a result of services performed by the organization is called earned revenue. Examples of earned revenues include membership dues, program fees, investment income, and more.
In addition to determining and noting whether each revenue source is contributed or earned, nonprofit organizations must also track restricted funds in order to stay compliant with the regulations set by the Generally Accepted Accounting Principles (GAAP).
- Restricted funds – Most often contributed revenue is also restricted revenue. Restrictions are stipulated by the funding source and require that that money is used for one specific purpose or for a predetermined amount of time.
- Unrestricted funds – Earned revenues typically become unrestricted funds that can be used by the nonprofit for any business need. These funds may be used to cover utility bills, salaries and wages, or office expenses.
After revenues on the Statement of Activities, the organization’s expenses come next, which shows what money the nonprofit has spent. Expenses are broken down into three categories: program, administrative, and fundraising.
- Program expenses – Typically made up of business expenses paid with restricted funds, program expenses describe the money spent on each program, project, or approved activity. Program expenses are usually listed by the program and correlate to an approved grant budget or project forecast.
- Administrative expenses – Administrative expenses may also be called general operating expenses and describe the money spent to keep the organization running, like rent, insurance, and office expenses. Administrative expenses are usually paid for by earned revenue, but a portion of admin. Costs may also be allocated to program or project budgets.
- Fundraising expenses – The cost of hosting and participating in fundraising efforts is listed separately from program expenses or administrative expenses.
Once the total expenses are subtracted from the total collected revenue, the result is a change in Net Assets. Net assets can be used as a quick measure of the organization’s net income. Since nonprofits operate with the intention of using all profit to fuel their mission, the change in net assets is typically much smaller when compared with a for-profit entity.
- The Statement of Activities is one of the three key financial reports for a nonprofit organization.
- The Statement of Activities gives the same information as found on a for-profit entity’s income statement.
- Revenues are broken into restricted and unrestricted funds and must meticulously be tracked in their appropriate “bucket.”
- Revenues minus expenses give the change in Net Assets or the total Net Income for the period.
Compiling and reading financial statements can be overwhelming. Many organizations choose to partner with a third-party nonprofit expert, like JFW Accounting Services, as a cost-effective and efficient way to manage reporting requirements.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.